Yes, it’s a housing bubble!

At this point, you cannot deny: Canada is in the middle of a massive housing bubble.

With stocks hitting new highs almost every day, and houses priced ridiculously, it would seem that everything is in a bubble these days. Especially with homes in Toronto rising 22% in value year-over-year.

Make no mistake – The bubble is no longer just in markets like Toronto and Vancouver. It is squeezing into smaller towns and communities all over Canada. The question is: when the bubble bursts, how big will the correction be?

A traditional housing market will appreciate in line with inflation and income growth trends, with is usually contained at around 3%. Right now we are looking at values at 22% over last year – ludicrous.

Here’s some perspective:

If you look at the Toronto Teranet-National Bank Home Price Index, the appreciation of the index over the last 17 years is 200%. This inflation is right in line with Japan’s market when it rose 193% right before its peak, and the U.S’s index when it rose 152% before its crash in 2008.

The conclusions from this chart are:

Toronto’s home price appreciation is right in line with other notable housing bubbles

If the market does peak, will it follow Japan’s market (which is still worth only half of what it was worth in 1991), or will it track more like the U.S which declined 30% in 2008, but has since fully recovered?

Personally, I do not foresee a correction as large as the U.S at 30%. I feel it will be more in line with the 10-20% range. Whatever the outcome, historical data supports our views that Canada’s housing market is out of control, and we are nearing the peak.